The purpose of this thesis is to identify key factors underlying exchange rate developments during the European sovereign debt crisis by examining the impact of credit rating news, published by the three leading credit rating agencies, on conditional returns and volatility of EUR/USD (direct quotation) exchange rate. Empirical results highlight the importance of interest rate differential and volatility index of options exchange in explaining EUR/USD exchange rate volatilities. Downgrade announcements by Standard & Poor’s as well as watch revisions by Fitch Ratings had a detrimental impact on the value of Euro, leading to a subsequent Euro depreciation over the period under consideration (January 2009 – April 2012).

[pt] A hipótese de que existe um problema grave de moral hazard no mercado de dívida soberana induzido pelo FMI é uma parte essencial do diagnóstico corrente das deficiências do sistema financeiro internacional. O mesmo pode ser dito em relação ao papel central que essa hipótese ocupa nas propostas de reformulação do sistema. A literatura empírica que avalia essa hipótese, contudo, apresenta suporte ambíguo à tese e os resultados não são definitivos. Aplicamos a metodologia de teste desenvolvida em Dell´Ariccia et al. (2002) à crise da Argentina de 2001 e realizamos dois outros testes da hipótese. Analisamos suas implicações teóricas, realizando, adicionalmente, uma extensão do modelo de Spiegel (2000) para interpretar o problema de moral hazard no mercado dívida soberana. Nossos resultados acrescentam evidência contrária à hipótese de moral hazard, mas estão sujeitos, assim como o restante da literatura, a um problema de interpretação. / [en] The hypothesis that there exists a significant problem of moral hazard induced by the IMF in the international loan market is an essential ingredient of the diagnosis of the deficiencies of the international financial system. The same applies to the current proposals to restructure the system. The literature presents ambiguous support to this thesis and the results are, in our view, not definitive. We apply the methodology developed by Dell Ariccia et al. (2002) to the Argentinean crisis in 2001 and carry out two other tests of the referred hypothesis. We also investigate its theoretical implications, extending Spiegel s (2000) model to interpret the problem of moral hazard in the international loan market. The results of this study provide additional evidence against the moral hazard hypothesis. There is, although, a caveat that we share with the rest of the literature that regards an identification hypothesis. We argue that it is not so important for the results presented in this study.

This research aims to explain mechanisms of the new twin crisis, the influence of such a crisis on European integration, and identify indicators that can predict such a twin crisis. First, the old and the new twin crisis will be explained and the necessity of this research will be elaborated upon. Hereafter, the main mechanisms of the new twin crisis will be identified based on a literature review. From this literature review a set of indicators, accompanied by certain thresholds, will be created that can indicate that a twin crisis is about to happen. These indicators will be used to analyse data from 1970 until 2015 to asses whether this new twin crisis has occured in the past and what its political consequences were. The constructed mechanism to explain the new twin crisis and the list of indicators will be put to the test by conducting an indepth case study of Italy and its risk of encountering a new twin crisis. Based on the model that links the new twin crisis to political consequences, the case study attempts to link the new twin crisis to the European integration project. This research will lay the foundation for the creation of predictive models for the new twin crisis and provide insights in one of the main destabilisers for European integration. It therefore establishes a set-up and lay-out for future research in this specific field.

Standard economic theory suggests that capital should flow from rich countries to poor countries. However, capital has predominantly flowed to rich countries. The three essays in this dissertation attempt to explain this phenomenon. The first two essays suggest theoretical explanations for why capital has not flowed to the poor countries. The third essay empirically tests the theoretical explanations. The first essay examines the effects of increasing returns to scale on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically. The second essay examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem. I model sovereign borrowing with a two-sector economy: one sector with increasing returns to scale (IRS) and one sector with diminishing returns to scale (DRS). Countries with incomes below a threshold will only invest in the DRS sector, and countries with incomes above a threshold will invest mostly in the IRS sector. The results help explain the existence of a bimodal world income distribution. The third essay empirically tests the explanations for why capital has not flowed from the rich to the poor countries, with a focus on institutions and initial capital. I find that institutional variables are a very important factor, but in contrast to other studies, I show that institutions do not account for the Lucas Paradox. Evidence of increasing returns still exists, even when controlling for institutions and other variables. In addition, I find that the determinants of capital flows may depend on whether a country is rich or poor.

The objective of the thesis is to provide a theory that explains the stylized facts regarding the trend of taxation policies, public spending and sovereign debt in advanced economies for the past couple of decades. The thesis focuses on distinguishing two types of public spending - productive investment and welfare payment and develops two different frameworks to examine the importance of the composition of these two types of public spending for economic growth and welfare. Chapter 2 presents a dynamic political-economy model in which voters decide tax rates and the proportion of public goods expenditure devoted to non-productive (but utility-enhancing) public goods. This non-productive public goods expenditure gives rise to a habit effect - it has to be at least as large as a fraction of last period value to provide utility. The median voter theorem applies. Starting from a steady state without the habit effect, its introduction leads to transitional dynamics that mimic several stylized facts: in particular, countries with higher income tend to have larger government and spend more on welfare programme. Chapter 3 studies the impact of public deficit on long-run economic growth by distinguishing the different types of government spending: investment and welfare payment. The model in this chapter predicts a non-monotonic or threshold effect in the relationship between public deficit and steady state growth rate. The composition of the public spending (the ratio between productive and non-productive) dictates the "threshold" in the national debt level. Countries which spend more on providing productive public goods could maintain a higher level of national debt that promotes growth.

There is a growing and legitimate concern about sovereign debt increasing to unsustainable levels among the Sub-Saharan African (SSA) countries. Understanding the determinants of external debt to these countries influenced the direction of this study. The existing literature that was examined shed light mostly on the qualitative determinants of sovereign borrowing. In addition to existing empirical literature, there is a complimentary need to examine further the quantitative determinants of external debt. The researcher seeks to establish the extent to which the cost of borrowing (proxied by interest rate) explains the changes in the borrowing behaviour (proxied by external debt) among SSA countries. To achieve this objective, data from 36 SSA countries for the period 2009–2017 was used. The data were collected from International Debt Statistics compiled by the World Bank. External debt has been regressed against interest rate and other predictor variables. Hausman tests, robustness tests and collinearity tests were carried out to ascertain the validity of results. Interest rate is found to have a positive determining impact on external debt for all SSA countries aggregated: SSA countries excluding South Africa (SA); SSA excluding Nigeria; SSA excluding Nigeria and SA; SSA excluding debt-distressed countries, middle income and oilexporting countries. It does not have predictive power over changes in external debt for SSA excluding countries at high risk of distress; countries with low to moderate risk of distress; heavily indebted poor countries (HIPC) initiative post-implementation recipient countries; low income, other resource intensive and non-resource-intensive countries. External debt is also found to respond to changes in: gross national income (GNI); exports-to-imports ratio; primary income on foreign direct investment (FDI); reserves-to-imports ratio; FDI-to-GNI ratio; debt service-to-GNI ratio; interest arrears on long-term debt; short-term-to-total-debt ratio; and reserves-to-debt ratio for different country groupings. Different country groupings are found to have unique combinations of external debt determinants.

archives@tulane.edu / The overarching argument in this study is that although sovereign distressed debt investors can create holdout problems during the debt restructuring of a defaulting sovereign, the reality is that they remain a linchpin for an efficient sovereign debt market that guarantees the flow of private credit for capital formation in the Global South. In other words, holdout creditors are a bit of a curate's egg, a necessary feature of the sovereign debt markets. They are not the “spawn of the devil”. The presence of distressed debt investors in the market contributes to the liquidity and efficiency of the market. They enable non-litigant investors who would like to sell their debt and exit the market on their own volition to do so. In addition, they tend to put pressure on recalcitrant sovereign debtors who might not be acting in good faith. They therefore possess “nuisance value” that could spur efficiency in the sovereign debt market. In this context, a universal framework for dealing with holdout problems during the debt restructuring of a defaulting sovereign is needed and that is what this study proposes. Such rules can be developed into a soft-law mechanism spearheaded by the International Monetary Fund (IMF). A global normative framework that has elements of nonmarket private standard setting and nonmarket public standard setting, is therefore proposed to address the disruptive and exploitative activities of these creditors in the sovereign debt market. This normative framework would strike the delicate balance between the rights of commercial creditors on the one hand, and interests of sovereign debtors on the other hand, and inject some measure of equity into the process. In summary, this study challenges the contemporary negative and dismissive narratives about holdout creditors, and the assumption and unshaken faith placed on “restructuring or workout of sovereign debt” as the only favored path to alleviating the perennial problem of sovereign default and the attendant debt crises in the developing world. / 1 / MARIA OLUYEJU

This dissertation consists of three chapters and is centered on the issues of external debt default and growth. In the first chapter, we develop a macrodynamic model of a small open economy that incorporates the effects of haircut and external debt default on the borrowing cost of a debtor country. We argue that the ability to impose a substantial haircut, a reduction in external debt in the face of a sovereign default can work as a strong enough incentive for a debtor country to borrow heavily even when it faces an increased default risk. Calibrating our model to real world data and employing numerical simulations we show that the observed overborrowing and consequently multiple external debt defaults by many countries around the world are equilibrium outcomes in the presence of the haircut induced benefit of sovereign default. Chapter two empirically investigates how debt default affects growth in low-income countries that have a high debt burden. We adopt Rose’s (2005) methodology of using dummy variables to examine both the contemporaneous and lagged effects of debt default on growth in countries that received debt relief assistance under the Heavily Indebted Poor Countries Initiative (HIPC). An inflow of capital is expected to affect these economies differently than other countries which are not eligible for the HIPC initiative. Our findings indicate that initiation of an external debt default leads to a downturn in growth, possibly due to the uncertainty created by such an event. However, debt renegotiation marking the conclusion of a default spell helps to revive growth and contributes to about 1 percentage point increase in growth for these countries. This positive growth effect of successful completion of a default episode is robust to different specifications and is pertinent even in the long run. In the third chapter, we examine the differential impacts of debt renegotiation on the various sectors within an economy. We analyze more than fifty years of data for ten broadly defined sectors from twenty-four mostly developing countries around the world. Our results indicate that debt rescheduling is associated with five to nine percent growth in sectoral productivity in countries outside of sub-Saharan Africa. This positive impact of debt renegotiation is particularly significant in the sectors of mining, construction, trade services, transport services, business services and personal services. Our findings provide support to the postulations of the debt overhang theory and the crowding out theory at sectoral level.

Submitted by GUSTAVO OKUYAMA (gus_okuyama@yahoo.com.br) on 2014-09-08T18:50:02Z No. of bitstreams: 1 DISSERTAÇÃO_-_GUSTAVO_PI_OKUYAMA.pdf: 3558280 bytes, checksum: acaa9096fa2c3acd422630503354a330 (MD5) / Approved for entry into archive by JOANA MARTORINI (joana.martorini@fgv.br) on 2014-09-08T19:40:52Z (GMT) No. of bitstreams: 1 DISSERTAÇÃO_-_GUSTAVO_PI_OKUYAMA.pdf: 3558280 bytes, checksum: acaa9096fa2c3acd422630503354a330 (MD5) / Made available in DSpace on 2014-09-08T19:42:44Z (GMT). No. of bitstreams: 1 DISSERTAÇÃO_-_GUSTAVO_PI_OKUYAMA.pdf: 3558280 bytes, checksum: acaa9096fa2c3acd422630503354a330 (MD5) Previous issue date: 2014-08-07 / This study examines how the variables of interest, inflation, exchange rates and economic activity influences the cost of issuing public debt fixed rate bonds in Brazil from 2006 to 2014, for four different maturities. To achieve this objective, variables with constant duration were created, by using the fixed rate costs of bonds in the sovereign debt. The econometric models are based on the estimation of the relation between basic interest rates, exchange rates, inflation, retail sales and the created fixed income bonds, using the autoregressive vector as the statistic model. We have concluded that, the present raise in SELIC implies in fixed rate debt costs decreasing, with the market pricing a future decreasing movement in SELIC. Also, dollar appreciation increases the debt cost in up to one (1) year, in response of a relative local and external interest rate adjusts, and as a possible expectation of a rise in inflation. The increase in inflation generates an interest rate hike in short term, causing interest rates of terms from two and four years to decrease. Retail Sales increase is a response of the market pricing; a need of an interest rate hike in the near future to control the economic activity. / Este trabalho teve como objetivo verificar como as variáveis de juros, inflação, câmbio e atividade econômica influenciam no custo de colocação da dívida pública pré-fixada nos horizontes de um semestre, um, dois e quatro anos. Com este objetivo, empregou-se a construção de variáveis de duration constante a partir das taxas dos títulos pré-fixados da dívida pública. Os modelos possuem como base a estimação da relação entre a taxa básica de juros, taxas de câmbio e de inflação, vendas no varejo e custo da dívida pré-fixada, utilizando como ferramenta estatística o modelo de vetores autorregressivos. Como resultado concluímos que um aumento na taxa básica de juros no presente gera uma queda no custo da dívida pré-fixada, com o mercado precificando um futuro movimento de queda nos juros. Já uma apreciação do dólar impacta negativamente a dívida, de até um ano, pela necessidade de correção da taxa de juros relativa local e estrangeira e como possível resposta a um aumento de inflação. O aumento na inflação gera a necessidade de aumento dos juros básicos em um prazo mais curto, refletindo então na diminuição das taxas pré-fixadas mais longas a partir de dois anos. A consistente resposta à variável vendas no varejo resulta da precificação de um aumento futuro na taxa básica de juros com o objetivo de desaquecer a atividade econômica.

We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm. (authors' abstract) / Series: Department of Economics Working Paper Series